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    Family Law Legal Research Blog

    Worthless Madoff Asset Not Deemed "Mutual Mistake" So As to Reopen Settlement Agreement Postdivorce

    Posted by Gale Burns on Thu, May 31, 2012 @ 13:05 PM

    The Lawletter Vol 36 No 12

    Brett Turner, Senior Attorney, National Legal Research Group

    Can a property division order be reopened for mistake when a marital asset turns out to be worth much less than the parties and the court believed at the time of divorce?

    This issue recently came before the highest court of New York in a case which received significant media attention.  In Simkin v. Blank, the parties signed a separation agreement in which they divided their marital property.  Each spouse generally received ownership of property titled in his or her name.  Because more marital property was titled in the husband's name, he agreed to pay to the wife just over $6 million to equalize the division.  The separation agreement was incorporated into a divorce decree.

    Unfortunately for the husband, one of the assets titled in his name alone was a $5.4 million investment account.  The account was with Bernard L. Madoff Investment Securities.  After the divorce, Madoff's entire operation was revealed as an enormous Ponzi scheme, Madoff was imprisoned for fraud, and the account became worthless.

    Two years after the divorce, the husband filed a motion to reopen the decree and reform the agreement, arguing that $2.7 million of the payment he made to the wife represented her share of the Madoff account, which was actually worth zero at the time of divorce but was valued at $5.4 million due to mutual mistake.  The trial court dismissed the husband's motion.  The New York Appellate Division reversed, holding that the husband had pleaded a valid claim of mutual mistake.  Simkin v. Blank, 915 N.Y.S.2d 47 (App. Div. 2011).

    On further appeal, the New York Court of Appeals reinstated the trial court's judgment dismissing the complaint.  The court relied first on the fact that the separation agreement did not even mention the Madoff account:

    [H]usband's claim that the alleged mutual mistake undermined the foundation of the settlement agreement, a precondition to relief under our precedents, is belied by the terms of the agreement itself.  Unlike the settlement agreement in True that expressly incorporated a "50-50" division of a stated number of stock shares, the settlement agreement here, on its face, does not mention the Madoff account, much less evince an intent to divide the account in equal or other proportionate shares (see Centro, 17 N.Y.3d at 277, 929 N.Y.S.2d 3, 952 N.E.2d 995 [explaining that "courts should be extremely reluctant to interpret an agreement as impliedly stating something which the parties have neglected to specifically include" (internal quotation marks and citation omitted)]).  To the contrary, the agreement provides that the $6,250,000 payment to wife was "in satisfaction of [her] support and marital property rights," along with her release of various claims and inheritance rights.  Despite the fact that the agreement permitted husband to retain title to his "bank, brokerage and similar financial accounts" and enumerated two such accounts, his alleged $5.4 million Madoff investment account is neither identified nor valued.  Given the extensive and carefully negotiated nature of the settlement agreement, we do not believe that this presents one of those "exceptional situations" (Da Silva, 53 N.Y.2d at 552, 444 N.Y.S.2d 50, 428 N.E.2d 382 [internal quotation marks and citation omitted]) warranting reformation or rescission of a divorce settlement after all marital assets have been distributed.

    Simkin v. Blank, 2012 N.Y. Slip Op. 02413, *5-6, 2012 WL 1080295, at headnote 6 (N.Y. 2012) (Westlaw pagination not yet available).

    In addition, the court rejected the husband's claim that the account had had no value at the time of divorce.  Madoff's fraud was not exposed until several years after the divorce, and the husband could have withdrawn funds from the account at any point during that time.  There was accordingly no mutual mistake as to the value of the account at the time of divorce:

    This situation, however sympathetic, is more akin to a marital asset that unexpectedly loses value after dissolution of a marriage; the asset had value at the time of the settlement but the purported value did not remain consistent. Viewed from a different perspective, had the Madoff account or other asset retained by husband substantially increased in worth after the divorce, should wife be able to claim entitlement to a portion of the enhanced value?  The answer is obviously no.  Consequently, we find this case analogous to the Appellate Division precedents denying a spouse's attempt to reopen a settlement agreement based on post‑divorce changes in asset valuation.

    Id. *6, 2012 WL 1080295, at headnote 6, last ¶.  Thus, a drop in the value of an account two years after the divorce is not sufficient evidence of a mutual mistake at the time of divorce to permit reopening of the decree.

    Topics: legal research, The Lawletter Vol 36 No 12, family law, Brett turner, Madoff asset, reopening of property division order, asset worth $0 at time of divorce, drop in account insufficient for mutual mistake

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